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Daily Rules, Proposed Rules, and Notices of the Federal Government

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 243

[Release No. 34-61050; File No. S7-04-09]

RIN 3235-AK14

Amendments to Rules for Nationally Recognized Statistical Rating Organizations

AGENCY: Securities and Exchange Commission ("Commission").
ACTION: Final rules.
SUMMARY: The Commission is adopting rule amendments that impose additional disclosure and conflict of interest requirements on nationally recognized statistical rating organizations ("NRSROs") in order to address concerns about the integrity of the credit rating procedures and methodologies at NRSROs.
DATES: Effective Date:February 1, 2010.

Compliance Date:June 2, 2010.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate Director, at (202) 551-5525; Thomas K. McGowan, Deputy Associate Director, at (202) 551-5521; Randall W. Roy, Assistant Director, at (202) 551-5522; Joseph I. Levinson, Special Counsel, at (202) 551-5598; Rebekah E. Goshorn, Attorney, at (202) 551-5514; Division of Trading and Markets, Securities and Exchange Commission; 100 F Street, NE., Washington, DC 20549-7010 or, with respect to questions involving the amendments to Regulation FD, Eduardo Aleman, Special Counsel, at (202) 551-3646; Division of Corporation Finance, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-3628.
SUPPLEMENTARY INFORMATION: I. Background A. Prior Commission Actions

On June 16, 2008, the Commission, in the first of three related actions, proposed a series of amendments to its existing rules governing the conduct of NRSROs under the Securities Exchange Act of 1934 (“Exchange Act”) as well as a new rule mandating additional requirements for NRSROs.1 The proposed amendments in theJune 2008 Proposing Releasewere designed to further the purposes of the Credit Rating Agency Reform Act of 2006 (“Rating Agency Act”) to improve ratings quality for the protection of investors and in the public interest by fostering accountability, transparency, and competition in the credit rating industry.2 More particularly, they were designed to enhance the transparency and objectivity of the NRSRO credit rating process generally and in particular with respect to rating structured finance products,3 to increase competition among NRSROs, and to make it easier for market participants to assess the credit ratings performance of NRSROs. For example, the amendments, as proposed, would have required NRSROs to make additional public disclosures about their methodologies for determining structured finance ratings, publicly disclose the histories of their ratings, and make additional internal records and furnish additional information to the Commission in order to assist staff examinations of NRSROs. The proposals also would have prohibited NRSROs and their analysts from engaging in certain activities that could impair their objectivity, such as recommending how to obtain a desired rating and then rating the resulting security.

1 See Proposed Rules for Nationally Recognized Statistical Rating Organizations,Exchange Act Release No. 57967 (June 16, 2008), 73 FR 36212 (June 25, 2008) (“June 2008 Proposing Release”). The Commission adopted the initial set of NRSRO rules in June 2007.See Oversight of Credit Rating Agencies Registered as Nationally Recognized Statistical Rating Organizations,Exchange Act Release No. 55857 (June 5, 2007), 72 FR 33564 (June 18, 2007) (“June 2007 Adopting Release”). The second action taken by the Commission (also on June 16, 2008) was to propose a new rule that would require NRSROs to distinguish their ratings for structured finance products from other classes of credit ratings by publishing a report with the rating or using a different rating symbol.See June 2008 Proposing Release.The third action taken by the Commission was to propose a series of amendments to rules under the Exchange Act, the Securities Act of 1933 (“Securities Act”), the Investment Company Act of 1940 (“Investment Company Act”), and the Investment Advisers Act of 1940 that would eliminate references to NRSRO credit ratings in certain rules.See References to Ratings of Nationally Recognized Statistical Rating Organizations,Exchange Act Release No. 58070 (July 1, 2008), 73 FR 40088 (July 11, 2008);Securities Ratings,Securities Act Release No. 8940 (July 1, 2008), 73 FR 40106 (July 11, 2008);References to Ratings of Nationally Recognized Statistical Rating Organizations,Investment Company Act Release No. 28327 (July 1, 2008), 73 FR 40124 (July 11, 2008).

2 See Credit Rating Agency Reform Act of 2006,Pub. L. No. 109-291;Report of the Senate Committee on Banking, Housing, and Urban Affairs to Accompany S. 3850, Credit Rating Agency Reform Act of 2006,S. Report No. 109-326, 109th Cong., 2d Sess. (Sept. 6, 2006) (“Senate Report”), p. 2.

3The term “structured finance product” as used throughout this release refers broadly to any security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction. This broad category of financial instrument includes, but is not limited to, asset-backed securities such as residential mortgage-backed securities (“RMBS”) and to other types of structured debt instruments such as collateralized debt obligations (“CDOs”), including synthetic and hybrid CDOs, or collateralized loan obligations (“CLOs”).

On February 2, 2009, the Commission adopted, with revisions, a majority of the rule amendments proposed in theJune 2008 Proposing Release. 4 Concurrently with the adoption of those final rule amendments, the Commission proposed additional amendments to paragraph (d) of Rule 17g-2 with respect to the disclosure of ratings histories. The Commission also re-proposed with substantial modifications amendments to paragraphs (a) and (b) of Rule 17g-5, a new paragraph (e) to Rule 17g-5, and a conforming amendment to Regulation FD.5

4 See Amendments to Rules for Nationally Recognized Statistical Rating Organizations,Exchange Act Release No. 59342 (February 2, 2009), 74 FR 6456 (February 9, 2009) (“February 2009 Adopting Release”).

5 See Re-proposed Rules for Nationally Recognized Statistical Rating Organizations,Exchange Act Release No. 59343 (February 2, 2009), 74 FR 6485 (February 9, 2009) (“February 2009 Proposing Release”).

Today, the Commission is adopting, with revisions, the rule amendments proposed in theFebruary 2009 Proposing Release.

B. Summary of the Comments and Final Rules

In enacting the Rating Agency Act, which provides the Commission with the authority to establish a registration and oversight program for NRSROs, Congress cited as its purpose “to improve ratings quality for the protection of investors and in the public interest by fostering accountability, transparency, and competition in the credit rating agency industry.”6 The Commission seeks to further the purposes of Congress in enacting the Rating Agency Act. The rule amendments being adopted today are designed to improve ratings quality for the protection of investors and in the public interest by fostering accountability, transparency, and competition in the credit rating agency industry. In theJune 2008 Proposing Release,the Commission cited concerns about the integrity of NRSROs' credit rating procedures and methodologies in light of the role they played in the credit market turmoil.7 As discussed throughout this release, the amendments being adopted today continue the Commission's process of addressing concerns about the integrity of the credit rating procedures and methodologies at NRSROs. The amendments incorporate most aspectsof the proposed and re-proposed amendments but include several revisions based on the comments received.

6 See Senate Reportp. 2;Rating Agency Act§ 2 (Finding 5).

7 See June 2008 Proposing Release,73 FR at 36213-36218.

The Commission received letters from 31 commenters8 on the proposed and re-proposed amendments set forth in theFebruary 2009 Proposing Release. 9 Several commenters expressed general support for the proposed measures and the goals they were designed to achieve.10 Commenters expressed support, for example, for the Commission's efforts to increase transparency11 and foster competition within the credit ratings industry.12 Other commenters, however, expressed concerns about the potential negative effects of the proposed and re-proposed rule amendments.13 Those comments included concerns that action more vigorous than that proposed by the Commission was needed to improve the quality of credit ratings14 and to facilitate investors' independent analysis of the products underlying such ratings,15 as well as the concern that increased competition would not necessarily increase the quality of credit ratings.16

8On April 15, 2009, the Commission held a Roundtable to Examine Oversight of Credit Rating Agencies (“Roundtable”). A number of the letters and statements submitted in connection with the Roundtable commented on the proposed rule amendments contained in theFebruary 2009 Proposing Releaseand are discussed herein. All comments submitted in connection with the Roundtable are available on the Commission's Internet Web site, located at:http://www.sec.gov/comments/s7-04-09/s70409.shtmland in the Commission's Public Reference Room in its Washington, DC headquarters.

9Letter dated February 26, 2009 from Mike Marchywka (“Marchywka Letter”); letter dated March 5, 2009 from Shawn S. Fahrer, Student, CUNY (“Fahrer Letter”); letter dated March 8, 2009 from Russell D. Sears (“Sears Letter”); letter dated March 18, 2009 from Takefumi Emori, Managing Director, Japan Credit Rating Agency, Ltd. (“JCR Letter”); letter dated March 25, 2009 from Laurel N. Leitner, Analyst, Council of Institutional Investors (“Council Letter”); letter dated March 25, 2009 from Mary Keogh, Managing Director, Regulatory Affairs and Daniel Curry, President, DBRS, Inc. (“DBRS Letter”); letter dated March 25, 2009 from Richard Whiting, Executive Director and General Counsel, Financial Services Roundtable (“FSR Letter”); letter dated March 25, 2009 from Charles D. Brown, General Counsel, Fitch Ratings (“Fitch Letter”); letter dated March 26, 2009 from Gregory W. Smith, General Counsel, Colorado Public Employees' Retirement Association (“Colorado PERA Letter”); letter dated March 26, 2009 from Douglas Adamson, Executive Vice President, American Bankers Association (“ABA Letter”); letter dated March 26, 2009 from George Miller, Executive Director and Sean C. Davy, Managing Director, American Securitization Forum and Securities Industry and Financial Markets Association (“ASF/SIFMA Letter”); letter dated March 26, 2009 from Karrie McMillan, General Counsel, Investment Company Institute (“ICI Letter”); Letter dated March 26, 2009 from John P. Hunt, Acting Professor of Law, University of California, Davis (“Hunt Letter”); letter dated March 26, 2009 from Cate Long, Multiple-Markets (“Multiple-Markets Letter”); letter dated March 26, 2009 from Hidetaka Tanaka, Senior Executive Managing Director, Rating and Investment Information, Inc. (“RI Letter”); letter dated March 27, 2009 from Vickie A. Tillman, Executive Vice President, Standard and Poor's Investment Ratings Services (“SP Letter”); letter dated March 28, 2009 from Michel Madelain, Chief Operating Officer, Moody's Investor Service, Moody's (“Moody's Letter”); letter dated March 31, 2009 from Robert G. Dobilas, CEO and President, Realpoint, LLC. (“Realpoint Letter”); letter dated April 2, 2009 from Keith F. Higgins, Chair, Committee on Federal Regulation of Securities, American Bar Association Section of Business Law (“ABA Committee Letter”) (representing views of the Committee, not the American Bar Association); letter dated April 3, 2009 from Dottie Cunningham, CEO, Commercial Mortgage Securities Association (“CMSA Letter”); letter dated May 19, 2009 from Lawrence A. Pingree, SiliconValleyForex.com (“Pingree Letter”); statement by Gregory W. Smith, General Counsel, Colorado Public Employees' Corporation, submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“Colorado PERA Statement”); statement by Deborah A. Cunningham, Executive Vice President, Chief Investment Officer, Federated Investors, Inc., submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“Federated Statement”); statement by Glenn Reynolds, CEO, CreditSights, Inc., submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“CreditSights Statement”); statement by Alex J. Pollock, Resident Fellow, American Enterprise Institute, submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“AEI Statement”); statement by Raymond W. McDaniel, CEO and President, Moody's Investor Service submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“Moody's Statement”); statement by Robert G. Dobilas, President and CEO, Realpoint, Inc., submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“Realpoint Statement”); statement by Ethan Berman, RiskMetrics Group, submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“RiskMetrics Statement”); statement by Daniel Curry, President, DBRS Inc., submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“DBRS Inc. Statement”); statement by Paul Schott Stevens, President and CEO, Investment Company Institute, submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“ICI Statement”); statement by Sean Egan, Co-Founder and Managing Director, Egan-Jones Rating Co., submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“Egan-Jones Statement”); statement by James A. Kaitz, President and CEO, Association for Financial Professionals, submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“AFP Statement”); statement by George P. Miller, Executive Director, American Securitization Forum, submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“ASF Statement”); statement by James H. Gellert, President and CEO, and Dr. Patrick James Caragata, Founder and Executive Vice Chairman, Rapid Ratings International, Inc., submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“Rapid Ratings Statement”); statement by Richard H. Baker, Managed Funds Associates, submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“MFA Statement”); letter dated June 1, 2009 from Christine DiFabio, Vice President, Advocacy and Accounting Policy, Financial Executives International (“FEI Letter”); letter dated June 12, 2009 from Curtis C. Verschoor, L Q Research Professor, School of Accountancy, DePaul University (“Verschoor Letter”). These comments are available on the Commission's Internet Web site, located athttp://www.sec.gov/comments/s7-04-09/s70409.shtmland in the Commission's Public Reference Room in its Washington, DC headquarters.

10 See, e.g., Marchywka Letter; Council Letter; Colorado PERA Letter; RI Letter; ABA Committee Letter; Pingree Letter; Realpoint Statement; FEI Letter.

11 SeeABA Committee Letter; Pingree Letter; Realpoint Statement.

12 SeeColorado PERA Letter.

13 See, e.g.,Fahrer Letter; DBRS Letter; ICI Letter; Hunt Letter; Moody's Letter; DBRS Statement; Verschoor Letter.

14 SeeHunt Letter.

15 SeeICI Letter.

16 SeeFahrer Letter; Hunt Letter.

The Commission notes that in addition to citing fostering competition in the credit rating industry as one of the purposes of the Rating Agency Act, Congress stated its finding in the Rating Agency Act that “additional competition [among credit rating agencies] is in the public interest.”17 In seeking to increase competition, the Commission seeks to further the purposes of Congress in enacting the Rating Agency Act.

17 See Rating Agency Act § 2.

In summary, the Commission is adopting amendments to paragraph (d) of Rule 17g-2 and paragraphs (a) and (b) of Rule 17g-5 as well as a new paragraph (e) of Rule 17g-5 and a conforming amendment to Regulation FD.18 The amendments to paragraph (d) of Rule 17g-2 require a broader disclosure of credit ratings history information. Specifically, as adopted in theFebruary 2009 Adopting Release,paragraph (d) of Rule 17g-2 requires the disclosure of ratings actions histories, in eXtensible Business Reporting Language (“XBRL”) format, for 10% of the ratings in each class for which the NRSRO has registered and for which it has issued 500 or more credit ratings paid for by the issuer, underwriter, or sponsor of the security being rated (“issuer-paid” credit ratings), with each required disclosure of a new ratings action to be made no later than six months after the ratings action is taken (hereinafter sometimes referred to as the “10% requirement”).19 The amendments beingadopted today add the requirement that an NRSRO disclose ratings action histories for all credit ratings initially determined on or after June 26, 2007 in an interactive data file that uses a machine-readable format (hereinafter sometimes referred to as the “100% requirement”). In the case of issuer-paid credit ratings, each new ratings action will be required to be reflected in such publicly disclosed histories no later than twelve months after it is taken, while in the case of ratings actions that are not issuer-paid, each new ratings action will be required to be reflected no later than twenty-four months after it is taken.20 An NRSRO will be allowed to use any machine-readable format to make this data publicly available until 60 days after the date on which the Commission publishes a List of XBRL Tags for NRSROs on its Internet Web site, at which point the NRSRO will be required to make the information available in the XBRL format using the Commission's List of XBRL Tags for NRSROs. This new disclosure requirement applies to all NRSRO credit ratings regardless of the business model under which they are determined. Consequently, the new requirement applies to all types of credit ratings regardless of whether they are issuer-paid credit ratings, credit ratings made available only to subscribers (“subscriber-paid” credit ratings), or credit ratings generated on an unsolicited basis and made publicly available (“unsolicited” credit ratings).

1817 CFR 243.100, 243.101, 243.102 and 243.103.

19 See February 2009 Adopting Release,74 FR at 6460-6462. As discussed in greater detail below, due to the fact that the Commission has not yetpublished the List of XBRL Tags for NRSROs on its Internet Web site, on August 5, 2009, the Commission provided notice that an NRSRO subject to those disclosure provisions can satisfy the requirement to make publicly available ratings history information in an XBRL format by using an XBRL format or any other machine-readable format, until such time as the Commission provides further notice.See infra,note 99 and accompanying text.

20 See17 CFR 240.17g-2(d).

The amendments to paragraphs (a) and (b) of Rule 17g-5 being adopted today, substantially as proposed in theFebruary 2009 Proposing Release,require an NRSRO that is hired by issuers, sponsors, or underwriters (hereinafter collectively “arrangers”) to determine an initial credit rating for a structured finance product to (1) disclose to non-hired NRSROs that have furnished the Commission with the certification described below that the arranger is in the process of determining such a credit rating and (2) to obtain representations from the arranger that the arranger will provide information given to the hired NRSRO to the non-hired NRSROs that have furnished the Commission with the certification described below.21 In addition, the new paragraph (e) of Rule 17g-5 being adopted today, as proposed in theFebruary 2009 Proposing Release,requires an NRSRO seeking to access information provided by an arranger to a hired NRSRO and made available to other NRSROs pursuant to the amended rule to furnish the Commission with an annual certification that the NRSRO is accessing the information solely to determine credit ratings and will determine a minimum number of credit ratings using that information.22 Finally, the amendment to Rule 100(b)(2)(iii) of Regulation FD being adopted today, substantially as proposed in theFebruary 2009 Proposing Release,accommodates the new disclosure requirements under Rule 17g-5 by permitting the disclosure of material non-public information to an NRSRO regardless of whether the NRSRO makes its ratings publicly available.23

21 See17 CFR 240.17g-5(a)(3) and (b)(9).

22 See17 CFR 240.17g-5(e).

23 See17 CFR 243.100(b)(2)(iii).

In order to allow NRSROs sufficient time to implement the new disclosure requirements, the compliance date of the amendments is delayed until 180 days after publication in theFederal Register. The Commission notes that it used the same time period for compliance with the 10% disclosure requirement pursuant to Rule 17g-2.24 While certain NRSROs already are complying with the 10% disclosure requirement, the Commission notes that the 100% disclosure requirements being adopted are an expansion of the current 10% disclosure requirements for issuer-paid credit ratings and for the first time will require all NRSROs to disclose ratings history. Therefore, with respect to the requirements under Rule 17g-5, the Commission believes the compliance date is appropriate in order to allow the NRSROs and arrangers sufficient time to implement the new disclosure requirements.

24 See February 2009 Adopting Release,74 FR at 6461.

II. Final Amendments to Rule 17g-2 A. Summary and Background

Rule 17g-2 requires an NRSRO to make and retain certain records relating to its business and to retain certain other records made in the normal course of business operations. The rule also prescribes the time periods and manner in which these records are required to be retained and, as described below, requires certain of those records regarding ratings histories to be publicly disclosed.25 The Commission is adopting today additional amendments to paragraph (d) of Rule 17g-2 to enhance the requirements in the rule to publicly disclose these records of credit rating histories for the purpose of providing users of credit ratings, investors, and other market participants and observers the raw data with which to compare the credit ratings performance of NRSROs by showing how different NRSROs initially rated an obligor or security and, subsequently, adjusted those ratings, including the timing of the adjustments.

25 See17 CFR 240.17g-2.

Paragraph (a)(8) to Rule 17g-2 requires an NRSRO to make and retain, as part of its internal records that are available to Commission staff, a record of the ratings history of each outstanding credit rating it maintains showing all rating actions (initial rating, upgrades, downgrades, placements on watch for upgrade or downgrade, and withdrawals) and the date of such actions identified by the name of the security or obligor rated and, if applicable, the CUSIP for the rated security or the Central Index Key (CIK) number for the rated obligor.26 Paragraph (d) of Rule 17g-2 requires an NRSRO to make publicly available in an XBRL format ratings action histories for 10% of the outstanding issuer-paid credit ratings required to be retained pursuant to paragraph (a)(8), selected on a random basis, for each class of credit rating for which it is registered and for which it has issued 500 or more issuer-paid credit ratings, with each required disclosure of a new ratings action to be made no later than six months after the ratings action is taken.27 Exhibit 1 of Form NRSRO requires an NRSRO subject to the public disclosure requirements of Rule 17g-2(d) to indicate in the exhibit the Web address where the XBRL Interactive Data File with the required information can be accessed.28

26 See February 2009 Adopting Release;17 CFR 240.17g-2(a)(8).

27 See February 2009 Adopting Release;17 CFR 240.17g-2(d).

28 See February 2009 Adopting Release;Instructions to Form NRSRO.

While paragraph (a)(8) of Rule 17g-2 and the amendments to Exhibit 1 were adopted in theFebruary 2009 Adopting Releasesubstantially as proposed, paragraph (d) of Rule 17g-2, as adopted, reflected modifications from the originally proposed amendment. Specifically, as proposed, the rule would have required an NRSRO to make ratings actions histories publicly available on its corporate Web site in XBRL format for 100% of outstanding credit ratings six months after the date of the rating action, regardless of whether the credit ratings were issuer-paid, subscriber-paid, or unsolicited.29 The rule as adopted, however, limited this required ratings history disclosure to 10% of the outstanding issuer-paid credit ratings required to be retained pursuant to paragraph (a)(8) of Rule 17g-2 for each class of credit rating for which the NRSRO is registered and for which it has issued 500 or more issuer-paid credit ratings, with each required disclosure of a new ratings action to be disclosed no later than six months after the ratings action is taken.30

29 See June 2008 Proposing Release,73 FR at 36228-36230.

3017 CFR 240.17g-2(d).

In theFebruary 2009 Proposing Release,the Commission stated that the amendments to paragraph (d) of Rule 17g-2 adopted in theFebruary 2009 Adopting Releasewould provide users of credit ratings with information to begin assessing the performance of NRSROs subject to the rule.31 The Commission also stated in theFebruary 2009 Proposing Releasethat it continued to believe that the proposed amendments to paragraph (d) of Rule 17g-2 set forth in theJune 2008 Proposing Release,which would have required public disclosure of ratings action histories for all outstanding credit ratings, could provide substantial benefits to users of credit ratings.32 However, the Commission wanted to solicit further comment on the proposed amendments to the rule in order to gain a better understanding of how they would impact NRSROs operating under the issuer-paid and subscriber-paid business models.33

31 See February 2009 Proposing Release,74 FR at 6487-6488.

32 See February 2009 Proposing Release,74 FR at 6487-6488.

33 See February 2009 Proposing Release,74 FR at 6487-6490.

Consequently, the Commission re-proposed amendments to paragraph (d) that would require disclosure of ratings histories for 100% of the issuer-paid credit ratings outstanding. In addition, the Commission asked a series of detailed questions to elicit information about how the rule proposal would impact issuer-paid NRSROs and whether the rule should be expanded to apply to all credit ratings: issuer-paid, subscriber-paid, and unsolicited.34

34 See February 2009 Proposing Release,74 FR at 6488-6490.

The amendments proposed in theFebruary 2009 Proposing Releasewould have created three new subparagraphs to paragraph (d) of Rule 17g-2: (d)(1), (d)(2), and (d)(3). Paragraphs (d)(1) and (d)(2) would have contained the text of paragraph (d) as adopted in theFebruary 2009 Adopting Release.Specifically, paragraph (d)(1) would have contained the record retention requirements of paragraph (d) as originally adopted by the Commission in theJune 2007 Adopting Release. 35 Paragraph (d)(2) would have contained the 10% ratings history disclosure requirements adopted by the Commission in theFebruary 2009 Adopting Release. 36 Finally, paragraph (d)(3) would have contained the new requirement that NRSROs disclose, in XBRL format, ratings history information for 100% of their outstanding issuer-paid credit ratings initially determined on or after June 26, 2007 (the effective date of the Rating Agency Act). Under the proposed amendment, a credit rating action would not have needed to be disclosed until twelve months after the action was taken.37

35 See June 2007 Adopting Release,72 FR at 33622;see also17 CFR 240.17g-2(d).

36 See February 2009 Adopting Release,74 FR at 6460-6463.

37 See February 2009 Proposing Release,74 FR at 6487-6488.

The Commission received responses from twenty-three commenters addressing various aspects of the proposed amendments to paragraph (d) of Rule 17g-2 and responding to some of the questions posed by the Commission.38 A substantial number of commenters expressed general support for expanding the public disclosure requirements for ratings history information.39 One NRSRO, for example, stated that the proposed amendment “balances the need for adequate disclosure of historical information with the legitimate commercial concerns of the NRSROs.”40 Some commenters, however, expressed general opposition to the proposed amendments.41 Two NRSROs, for example, questioned the Commission's authority to adopt the proposed disclosure requirements, contending that the amendments were not “narrowly tailored” and expressing concern over the potential impact the proposed requirements would have on their intellectual property interests and rights in their ratings data.42 As discussed below, the Commission is adopting the amendments to paragraph (d) of Rule 17g-2 under its authority to require NRSROs to make and keep for specified periods such records as the Commission prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act.43 In addition, the amendments as adopted are intended to further the goals of the Rating Agency Act, fostering competition, transparency, and accountability in the credit rating industry, by striking an appropriate balance between providing users of credit ratings, investors, and other market participants and observers with a sufficient volume of raw data with which to gauge the accuracy of different NRSROs' ratings over time while at the same time addressing concerns raised by NRSROs regarding their ability to derive revenue from granting market participants access to their credit ratings and downloads of their credit ratings.

38 SeeJCR Letter; Council Letter; DBRS Letter; Fitch Letter; Colorado PERA Letter; ABA Letter; ASF/SIFMA Letter; ICI Letter; Hunt Letter; Multiple-Markets Letter; RI Letter; SP Letter; Moody's Letter; Realpoint Letter; ABA Committee Letter; CMSA Letter; Colorado PERA Statement; Federated Statement; AEI Statement; Risk Metrics Statement; DBRS Statement; ICI Statement; AFP Statement; ASF Statement; Rapid Ratings Statement; MFA Statement.

39 See, e.g.,Council Letter; Fitch Letter; ASF/SIFMA Letter; ICI Letter; Hunt Letter; Multiple-Markets Letter; Colorado PERA Statement; Federated Statement; Risk Metrics Statement; AFP Statement; ASF Statement.

40 SeeFitch Letter.

41 See, e.g.,DBRS Letter; RI Letter; SP Letter; Moody's Letter.

42 SeeSP Letter; Moody's Letter.

43 SeeSection 17(a)(1) of the Exchange Act (15 U.S.C. 78q(a)(1)).

As discussed in detail below, the Commission is adopting paragraphs (d)(1) and (d)(2) substantially as proposed. However, in response to the comments received and to facilitate the ability of users of credit ratings to directly compare the ratings performance of all NRSROs, the Commission is expanding the ratings history disclosure requirement in new paragraph (d)(3) to include ratings history information for all NRSRO credit ratings initially determined on or after June 26, 2007 (the effective date of the Rating Agency Act), whether issuer-paid, subscriber-paid, or unsolicited. The amendment as adopted requires a ratings action on an issuer-paid credit rating to be publicly disclosed no later than twelve months after it is taken, as proposed in theFebruary 2009 Proposing Release.For ratings actions taken on ratings that are not issuer-paid, however, the amendment as adopted allows a delay of twenty-four months between the time a credit rating action is taken and the time it must be disclosed. The Commission is structuring the amendment as adopted in this manner in order to address commenters' concerns regarding the potentially disproportionate negative effects such a disclosure requirement could have on NRSROs operating under the subscriber-paid business model in the absence of a sufficiently long delaybetween the time a ratings action is taken—and made available to paid subscribers—and the time that ratings action must be made public.

In addition, as discussed in detail below, the Commission has not yet published the List of XBRL Tags for NRSROs on its Internet Web site. Consequently, the Commission is clarifying in the rule text of new paragraph (d)(3) of Rule 17g-2 that an NRSRO can make the required ratings history data publicly available in any machine-readable format, including XBRL, until 60 days after the date on which the Commission publishes a List of XBRL Tags for NRSROs on its Internet Web site, at which point the NRSRO will be required to make the information available in XBRL format using the List of XBRL Tags for NRSROs.

B. Paragraph (d)(1) of Rule 17g-2

As adopted, paragraph (d)(1) of Rule 17g-2 consists of the record retention requirements of paragraph (d) as originally adopted by the Commission in theJune 2007 Adopting Release.These requirements mandate that an NRSRO maintain an original, or a true and complete copy of the original, of each record required to be retained pursuant to paragraphs (a) and (b) of Rule 17g-2 in a manner that, for the applicable retention period specified in paragraph (c) of Rule 17g-2, makes the original record or copy easily accessible to the principal office of the NRSRO and to any other office that conducted activities causing the record to be made or received.44 The purpose of these requirements is to facilitate Commission examination of the NRSRO and to avoid delays in obtaining the records during an on-site examination.

44 See June 2007 Adopting Release,72 FR at 33622.

The Commission did not receive any comments on this proposal to codify the existing requirements of paragraph (d) as new paragraph (d)(1) and is adopting it as proposed.

C. Paragraph (d)(2) of Rule 17g-2

Paragraph (d)(2) of Rule 17g-2, as adopted, consists of the ratings history disclosure requirements adopted by the Commission in theFebruary 2009 Adopting Release(i.e.,the 10% requirement). As noted above, this provision requires an NRSRO to make publicly available, in an XBRL format, ratings action histories for 10% of the outstanding issuer-paid credit ratings required to be retained pursuant to paragraph (a)(8) of Rule 17g-2, selected on a random basis, for each class of credit rating for which it is registered and for which it has issued 500 or more issuer-paid credit ratings, with each required disclosure of a new ratings action to be made no later than six months after the ratings action is taken. Several commenters raised questions about whether it was appropriate or necessary to have both a 10% requirement and a 100% requirement. In particular, two commenters stated that the proposed 100% disclosure requirement of paragraph (d)(3) to Rule 17g-2 would be duplicative of the existing 10% disclosure requirement for issuer-paid ratings in new paragraph (d)(2).45 In addition, both of those commenters as well as a third suggested that the Commission consider the results of the 10% disclosure requirement before adopting the proposed 100% disclosure.46 These three commenters also argued that in light of the existing 10% disclosure requirement, the amendment as proposed, including the 100% disclosure requirement, was not narrowly tailored.47 One commenter noted that the Commission has not allowed any time to pass to be able to judge whether the existing 10% disclosure requirement will operate effectively to facilitate comparisons of the aggregate performance of issuer-paid ratings.48 Another commenter suggested extending the 10% requirement in paragraph (d)(2) of Rule 17g-2 to all NRSROs first before adopting the 100% disclosure requirement.49 A third commenter stated that the Commission should withdraw the 10% disclosure obligation altogether if it should decide to adopt the 100% requirement.50

45 SeeDBRS Letter; SP Letter.

46 SeeDBRS Letter; Moody's Letter; SP Letter.

47 SeeDBRS Letter; Moody's Letter; SP Letter.

48 SeeMoody's Letter.

49 SeeDBRS Letter.

50 SeeSP Letter.

The Commission notes that the 10% requirement and 100% requirement will provide different types of data sets with which to analyze and compare the performance of NRSROs' credit ratings. For example, the 10% requirement applies to all outstanding and future credit ratings that fall within the rule's scope (i.e.,an NRSRO is required to draw its random selection of a 10% sample from its entire pool of issuer-paid credit ratings, regardless of when the obligor or instrument was initially rated) whereas the 100% requirement is limited to outstanding credit ratings initially determined on or after June 26, 2007. Therefore, initially, the 10% requirement will provide ratings history information that is much more retrospective and will include ratings histories for credit ratings that have been outstanding for much longer periods of time. In addition, ratings actions subject to the 10% disclosure requirement must be disclosed more promptly (within six months) than ratings actions subject to the 100% requirement. The data generated by the 10% requirement will involve a longer time series of information and, therefore, is designed to aid statistical research on credit ratings performance.

The 100% ratings history disclosure requirement will result in a different data set. It will be broader in scope but more limited in time, applying only to credit ratings initially determined on or after June 26, 2007. The 100% disclosure requirement also allows for a longer delay between the time a ratings action is taken and the time it must be disclosed—twelve months for ratings actions on issuer-paid credit ratings and twenty-four months for ratings actions on ratings not issuer-paid—as opposed to the six month delay allowed under the 10% disclosure requirement. The 100% ratings disclosure will provide for a more granular comparison of the performance of an NRSRO's credit ratings. In particular, it will require ratings history disclosure for every outstanding credit rating of each NRSRO. This will permit users of credit ratings and others to take a specific debt instrument and compare the ratings history for the instrument of each NRSRO that rated it. Thus, whereas the 10% requirement will be limited to analyses using a statistical sampling, the 100% requirement will facilitate analyses of how the NRSROs each rated a specific obligor, security, or money market instrument. In addition, as discussed further below, whereas the 10% requirement is limited to issuer-paid credit ratings, the 100% requirement covers all credit ratings regardless of the business model under which they are issued, thereby allowing comparisons across and among a broader set of NRSROs. Thus, the comprehensive disclosure of ratings histories for all outstanding credit ratings will facilitate a more fundamental ratings-by-ratings comparisons across NRSROs, and will also generate data that can be used to develop independent statistical analyses of the overall performance of an NRSRO's credit ratings in total and within classes and subclasses of credit ratings (e.g., within product or industry types). This will provide users of credit ratings with more ways to analyze the performance of the NRSROs' credit ratings. The increased ability tounderstand how an NRSRO's credit ratings perform will further the goals of the Rating Agency Act to foster accountability, transparency, and competition in the credit rating industry.51

51 See Credit Rating Agency Reform Act of 2006,Pub. L. No. 109-291; Senate Report, p. 2.

Furthermore, the Commission notes that while the 100% requirement will be useful to market participants and observers within a short period of the rule being effective (the vast majority will be available at twelve months) for the purposes of comparing the performance of different NRSROs rating the same obligors or instruments, due to the June 26, 2007 cutoff date and the longer grace periods, it will take time for the new 100% disclosure requirement to generate the comprehensive data pool necessary for thorough independent analysis and comparison of the long-term ratings performance of the NRSROs. In the meantime, the 10% requirement will provide ratings performance information on issuer-paid credit ratings (the vast majority of outstanding NRSRO credit ratings). Thus, in addition to the other benefits of retaining the 10% requirement, the ratings performance and information it provides will help bridge the gap until the 100% requirement has generated a robust set of data.52

52According to Form NRSRO submissions by the NRSROs, issuer-paid credit ratings account for over 98% of the current credit ratings issued by NRSROs.

In light of the different structures of the two ratings history disclosure requirements as well as the different data sets which they will provide, and the corresponding complimentary ways in which they will advance the goals of the Rating Agency Act and the Commission's rules, the Commission believes that it would be beneficial to retain the 10% ratings history disclosure requirement alongside the new 100% disclosure requirement being adopted today.

Accordingly, the Commission is adopting new paragraph (d)(2) to Rule 17g-2 as proposed.

D. Paragraph (d)(3) of Rule 17g-2

As adopted, new paragraph (d)(3) to Rule 17g-2 requires each NRSRO to disclose ratings history information for 100% of its credit ratings initially determined on or after June 26, 2007, with each ratings action to be disclosed no later than twelve months or twenty-four months after it is taken, depending on whether the rating is issuer-paid. Any ratings action information required under the 100% disclosure requirement with respect to issuer-paid credit ratings need not be made public less than twelve months from the date such ratings action is taken. A ratings action on a rating that is not issuer-paid need not be made public less than twenty-four months from the date it is taken. As noted above, this represents a modification of the proposed amendment, which would have applied the 100% disclosure requirement only to issuer-paid ratings with a twelve month grace period. The Commission requested comments on a number of specific questions pertaining to this provision of the proposed amendment, and the modifications are designed to address the comments received in response to those questions.

The Commission specifically requested comment on whether the proposed 100% disclosure requirement should apply equally to issuer-paid and subscriber-paid credit ratings.53 The Commission received letters from seventeen commenters in response to this inquiry,54 with twelve of those commenters answering in the affirmative.55 Several commenters argued that excluding subscriber-paid credit ratings from the proposed disclosure requirements would be inconsistent with the Commission's goals in proposing the amendment—enhancing NRSRO accountability, transparency, and competition.56 In addition, several commenters stated that limiting the disclosure requirement to issuer-paid ratings would deprive users of the ability to assess the accuracy and integrity of subscriber-paid credit ratings.57 Two commenters argued that limiting the rule to issuer-paid credit ratings would result in a lack of uniformity in regulatory approach and create a lack of transparency for subscriber-paid credit ratings, and therefore would not be in the best interests of investors or the capital markets.58 One commenter in favor of expanding the disclosure requirement to include subscriber-paid credit ratings suggested allowing a longer posting delay for subscriber-paid ratings actions than for issuer-paid credit ratings.59

53 February 2009 Proposing Release,74 FR at 6489

54 SeeCouncil Letter; DBRS Letter; Fitch Letter; Colorado PERA Letter; ASF/SIFMA Letter; ICI Letter; Hunt Letter; Multiple-Markets Letter; SP Letter; Moody's Letter; Realpoint Letter; ABA Committee Letter; Colorado PERA Statement; AEI Statement; RiskMetrics Statement; DBRS Statement; ICI Statement; AFP Statement; Rapid Ratings Statement; MFA Statement.

55 SeeCouncil Letter; DBRS Letter; Fitch Letter; Colorado PERA Letter; ASF/SIFMA Letter; Multiple-Markets Letter; SP Letter; Moody's Letter; Colorado PERA Statement; RiskMetrics Statement; DBRS Statement; ICI Statement; AFP Statement; MFA Statement.

56 See, e.g.,Council Letter; Fitch Letter; Colorado PERA Letter; ASF/SIFMA Letter; SP Letter; Moody's Letter; ICI Statement.

57 See, e.g.,Council Letter; Fitch Letter; Colorado PERA Letter; ASF/SIFMA Letter; Moody's Letter; Colorado PERA Statement; MFA Statement.

58 SeeDBRS Statement; Moody's Letter.

59 SeeMultiple-Markets Letter.

Five commenters argued that the rule should not apply to subscriber-paid credit ratings.60 Concerns expressed by these commenters included a higher likelihood of substantial financial harm to subscriber-paid NRSROs that would arise from the required disclosures61 and the threat of overly burdensome and costly requirements.62 One commenter, arguing that “Subscriber-Paid competition introduces credibility back into the ratings business,” warned that the Commission should be “careful not to, in the interest of being overly fair * * * quash the very solutions to the problems so plaguing the industry.”63

60 SeeHunt Letter; Realpoint Letter; ABA Committee Letter; AEI Statement; Rapid Ratings Statement.

61 See e.g.,Hunt Letter; Realpoint Letter.

62 See e.g.,Realpoint Letter; Rapid Ratings Statement.

63Rapid Ratings Statement.

The Commission also asked whether the rule should apply to unsolicited credit ratings.64 The Commission received letters from nine commenters in response to this inquiry,65 with seven responding generally in the affirmative.66 One commenter noted that any distinction between solicited and unsolicited ratings would stigmatize unsolicited ratings and undercut the ability to foster competition,67 while others noted that the disclosure of unsolicited ratings provides a point of comparison facilitating efforts to identify those NRSROs with conflicts of interests.68 In contrast, one commenter stated that requiring unsolicited NRSROs to publish their ratings would “put them out of business.”69

64 See February 2009 Proposing Release,74 FR at 6490.

65 SeeCouncil Letter; DBRS Letter; Fitch Letter; Colorado PERA Letter ASF/SIFMA Letter; Hunt Letter; Multiple-Markets Letter; Realpoint Letter; ABA Committee Letter.

66 SeeCouncil Letter; DBRS Letter; Fitch Letter; Colorado PERA Letter; ASF/SIFMA Letter; Hunt Letter; ABA Committee Letter.

67 SeeFitch Letter.

68 See e.g.,Council Letter; Colorado PERA Letter.

69 SeeRealpoint Letter.

The Commission believes the rule should apply to all types of credit ratings, whether issuer-paid, subscriber-paid, or unsolicited. The intent of the rule is to facilitate comparisons of credit rating accuracy across all NRSROs—including direct comparisons of different NRSROs' treatment of the same obligor or instrument—in order to enhance NRSRO accountability,transparency, and competition. Excluding certain types of credit ratings issued by NRSROs from the rule's scope could undermine this goal, particularly where the exclusion effectively would remove an NRSRO entirely from the rule's scope because that NRSRO issues only the types of credit ratings not covered by the rule. Ratings history information for outstanding credit ratings is the most direct means of comparing the performance of two or more NRSROs. It allows an investor or other user of credit ratings to compare how all NRSROs that maintain a credit rating for a particular obligor or instrument initially rated that obligor or instrument and, thereafter, how and when they adjusted their credit rating over time. This will allow the person reviewing the credit rating histories of the NRSROs to reach conclusions about which NRSROs did the best job in determining an initial rating and, thereafter, making appropriate and timely adjustments to the credit rating.

For example, if three hypothetical NRSROs—X Credit Ratings Company, Y Credit Ratings Company, and Z Credit Ratings Company—each rated a hypothetical ABC Security, the 100% requirement would allow an investor to directly compare the ratings performance of those three NRSROs for that security. To illustrate, assume that when ABC Security was issued in August 2007, X Credit Ratings Company and Y Credit Ratings Company initially gave it their highest rating of `AAA,' while Z Credit Ratings Company initially rated it as `A.' Assume further that in March 2008, X Credit Ratings Company downgraded ABC Security to `AA,' followed by a June 2008 downgrade to `A,' while Y Credit Ratings Company maintained its `AAA' rating for ABC Security until August 2008, at which point it downgraded it to `A.' Assume also that Z Credit Ratings Company maintained its `A' rating for ABC Security without change. Under the 100% disclosure requirement adopted today, an investor reviewing the ratings histories in August 2009 would be able to see that X Credit Ratings Company and Y Credit Rating Companies had, by August 2008, arrived at the same `A' rating for ABC Security—but they will have taken significantly different paths to get to that rating:

X Credit ratings
  • company
  • Y Credit ratings
  • company
  • Z Credit ratings company
    August 2007 AAA AAA A March 2008 AA AAA A June 2008 A AAA A August 2008 A A A

    By examining the credit rating histories of the three hypothetical NRSROs for ABC Security, an investor will be able to perform an individual analysis of which NRSROs did the best job in determining an initial rating and in making appropriate and timely adjustments to the credit rating.

    The Commission believes that the new disclosure requirements will foster greater accountability and transparency for ratings performance for NRSROs as well as competition among NRSROs by making it easier for persons to analyze the actual credit ratings performance of NRSROs in assessing creditworthiness, regardless of the business model under which an NRSRO operates. These disclosures may also enhance competition by making it easier for smaller and less established NRSROs to develop proven track records when determining credit ratings and for potential users of their ratings to evaluate the relative quality and performance of these NRSROs.

    In addition to facilitating individual comparisons of NRSRO ratings performance, disclosure of ratings histories will allow market observers to generate statistics about NRSRO performance by compiling and processing the information in the aggregate. Currently, NRSROs are required to publicly disclose internally generated default and transition performance statistics in Exhibit 1 of Form NRSRO. The existing disclosure requirements of Exhibit 1, as amended in theFebruary 2009 Adopting Release, 70 provide investors and other users of credit ratings with useful, standardized performance statistics with which to compare the performance of NRSROs. The raw data to be provided by NRSROs pursuant to the new ratings history disclosure requirements, however, will enable market participants to develop performance measurement statistics that would supplement those required to be published by the NRSROs themselves in Exhibit 1, tapping into the expertise of credit market observers and participants in order to create better and more useful means to compare the credit ratings performance of NRSROs. The ratings history disclosure requirements adopted today will facilitate the ability of individual users of credit ratings to design their own performance metrics to generate the performance statistics most meaningful to them. Users of credit ratings will benefit from the ability to generate performance statistics best suited to their individual needs.

    70 See February 2009 Adopting Release,74 FR at 6457-6459.

    As discussed above, the arguments raised by commenters for excluding particular types of credit ratings from the rule's scope focused largely on the potential that the disclosure requirement will result in undue costs to, or have a disproportionate negative impact on the revenues of, NRSROs that issue that type of credit rating.71 For example, NRSROs that primarily determine subscriber-paid credit ratings argued that these ratings should not be subject to the rule because it will cause subscribers to stop paying them for access to current outstanding credit ratings.72 NRSROs that primarily determine issuer-paid and unsolicited credit ratings argued that these ratings should not be subject to a 100% disclosure requirement because it would cause persons who pay for downloadable access to their current ratings to stop paying for the service.73 They also argued that they derive separate revenue from selling access to historical information about their outstanding credit ratings.74

    71 See e.g.,Hunt Letter; Realpoint Letter.

    72 See e.g.,Realpoint Letter.

    73 See e.g.,JCR Letter; RI Letter.

    74 See e.g.,Moody's Letter; SP Letter.

    In theFebruary 2009 Proposing Release,the Commission asked a series of detailed questions to elicit information about whether the rule would have the impacts descri